Publicly Released: September 28, 2022
The objective of this audit was to determine whether Military Service contracting officials awarded cost-reimbursement contracts in accordance with Federal and DoD regulations and guidance.
Contracting officials use cost-reimbursement contracts when contracting officials cannot definitively describe work or estimate its costs with any reasonable degree of certainty. Cost-reimbursement contracts are high risk for the DoD due to the potential for cost escalation and because the Government pays a contractor’s costs, up to the amount obligated on the contract, even without a final deliverable. Specifically, cost-reimbursement contracts provide little to no incentive for a contractor to limit costs, unless there is an incentive built into the contracts for that purpose.
The DoD OIG previously conducted a series of audits on cost-reimbursement contract compliance and documenting the decisions and approvals that are required before using cost-reimbursement contracts. The DoD OIG made DoD-wide recommendations to comply with Federal regulations for the award of cost-reimbursement contracts.
Military Service contracting officials did not consistently award cost-reimbursement contracts in accordance with Federal and DoD regulations and guidance. Specifically, contracting officials consistently complied with cost-reimbursement contract requirements when awarding 38 of 83 cost-reimbursement contracts, valued at $20.54 billion. However, contracting officials did not consistently award the remaining 45 cost-reimbursement contracts, valued at $6.94 billion, in accordance with Federal and DoD regulations and guidance. Specifically, of the 83 contracts reviewed, contracting officials did not:
- obtain approval for the use of 11 cost-reimbursement contracts valued at $24 million;
- justify the use of 3 cost-reimbursement contracts valued at $5.32 million;
- document the possibility of a transition to a firm-fixed-price contract for 42 cost-reimbursement contracts, valued at $6.55 billion;
- ensure adequate Government resources were available to award and manage 8 cost-reimbursement contracts, valued at $969.41 million; or
- determine the adequacy of the contractor’s accounting system in consultation with auditors or functional specialist for 1 cost-reimbursement contract, valued at $280,000.
Military Service contracting officials did not consistently award the cost-reimbursement contracts because contracting officials thought Federal and DoD regulations for awarding cost-reimbursements contracts did not apply to research and development contracts, including those awarded under a Broad Agency Announcement.
In addition, contracting officials thought the requirement to document the possibility for a cost-reimbursement contract to a firm-fixed-price contract did not apply when contracting officials determined no follow-on contracts were needed after awarding the cost-reimbursement contract. As a result, Military Service contracting officials potentially increased contracting risks when awarding cost-reimbursement contracts without proper approvals, justifications, transition strategies, adequate Government resources, and adequate accounting systems. Specifically, contracting risks may increase for the DoD because of the potential for cost escalation and because the DoD pays a contractor’s costs regardless of whether the work is completed.
Among other recommendations, we recommend that the Principal Director of Defense Pricing and Contracting:
- clarify whether any exemptions exist regarding the applicability of current regulations for contracting officials to document in the contract file approval for the use of cost-reimbursement contracts and transition strategies to include the possibility for cost-reimbursement contracts to transition to firm-fixed-price contracts to the maximum extent practicable; and
- issue a memorandum or other guidance to emphasize coordination between contracting officials and the Defense Contract Management Agency, as part of acquisition planning, to ensure adequate Government resources are available to award and manage cost-reimbursement contracts before contract award.
We also recommend that the Military Services establish a process to formalize coordination between contracting officials and the Defense Contract Management Agency throughout the contracting process to identify and document in the acquisition plan or contract file that adequate accounting systems are in place and adequate Government resources are available to award and manage cost-reimbursement contracts before contract award.
Management Comments and Our Response
The Principal Director of Defense Pricing and Contracting and the Military Services agreed with all 13 of the recommendations. The actions planned for seven of the recommendations fully addressed the specifics of the recommendations and we consider those recommendations resolved but open. We will close those seven recommendations once we verify that the agreed-upon actions were completed. In addition, we verified that the Military Services completed action to address the remaining six recommendations; therefore, those recommendations are closed.
This report is the result of Project No. D2021-D000AV-0082.000.